S&P sees deeper house price falls in eurozone as slump engulfs core

Europe’s housing slump is engulfing large parts of the eurozone core as
recession deepens, with prices to keep sliding for another two years,
Standard & Poor’s has warned.

“Downturns in the Dutch and French housing markets appear to be accelerating.
We forecast nominal price declines of nearly 6pc and 5pc respectively this
year as rising unemployment, decelerating wages, and the prospect of
austerity measures frightens off buyers,” said Jean-Michel Six, the agency’s
chief Europe economist.

France’s house market has been a bastion of stability through most of the
global crisis but prices began to slip last year as President François
Hollande embarks on a draconian fiscal squeeze to meet EU deficit targets,
mostly by raising taxes. Home sales collapsed by 24pc in September from a
year ago, the usual precursor of price capitulation by sellers.

Mr Six said the “affordability ratio” in France is still roughly 30pc above
historic averages and credit is tightening. He expects French prices to fall
a further 5pc in 2014, bringing the peak-to-trough decline to 11pc.

This is a gentler denouement than the 40pc crash predicted by French
consultancy PrimeView, which describes the French market as a “gigantic
bubble” vulnerable to a witches brew of demographic effects, tight credit
and a loss of tax relief. It said prices had risen 160pc since 1998 at a
time when household incomes had gained just 35pc.

PrimeView said aging will have a “profound deflationary effect” on the French
market for the next quarter century. The pool of buyers will stay constant
at 33m, while number of the sellers will rise at an average rate of almost
250,000 each year.

S&P said Dutch prices would fall 5pc this year as austerity bites, and a
further 2pc in 2014, bringing the total fall to more than 25pc over six
years. “No recovery is in sight. Uncertainty about fiscal policy is adding
to buyers' lack of confidence. Households fear mortgage relief could be
further curtailed,” it said.

Dutch household debt reached almost 250pc of disposable income during the
credit bubble, compared with 150pc for Britain, 124pc for Spain and 66pc for
Italy, according to Eurostat data. The country’s underlying wealth should
allow it to unwind the excesses gradually.

The Netherlands is now in deep recession, an unexpected casualty of the
eurozone's contractionary policy mix. The Dutch central bank said in its
Financial Stability Report that the debt overhang has become acute. “The
outlook for financial stability is worrying. Dutch households have almost
the highest debt in the world. Declining real wages and rising unemployment
are putting pressure on incomes. The steady fall in house prices is
weakening their position while also increasing the likelihood of debt
problems.”

Standard & Poor’s said there is still “no relief in sight” for Spain as
the slump grinds on. House prices are likely to fall another 7.9pc this year
and 6pc in 2014, and may need to fall a further 20pc or more to clear an
overhang of 1m homes. "The market is saddled with excess supply.”

The good news - of sorts - is that new housing starts in Spain collapsed to
70,000 last year from a peak of 760,000 in 2006, “suggesting that the
adjustment process is now under way”.

Britain should muddle through with slight declines, shored up by an underlying
shortage of homes. New building has fallen to rate of barely 100,000 a year,
while demand is more than 230,000.

Economists say the Bank of England has engineered more inflation in Britain to
cushion the shock of the crisis, so "real" house prices are
adjusting by just as much as in the Netherlands. The consequence is that a
much lower proportion in the UK is now trapped in negative equity.

Italy has already taken most of its punishment and should stabilize next year
after a peak-to-trough fall of around 14pc. It avoided most of the recent
housing bubble and leverage is very low, with mortgages totalling just 23pc
of GDP. However, the economy is flat on its back and confidence has
collapsed to levels last seen in the depths of the crisis in 2009.

Germany is in its own world, enjoying a fresh housing cycle fuelled by record
low rates. Prices are still 16pc undervalued, the legacy of the
post-reunification slump in the late 1990s and the early part of this
decade. New house construction peaked in 1994 at 700,000 a year. It has now
fallen to 180,000, clearing the over-supply at last.

Standard & Poor’s expects 3pc rises in Germany this year and 3pc in 2014,
a slowdown after rises of 7.6pc in 2011 and 8.6pc in 2012. Aging effects
will keep a lid on gains and become a major headwind henceforth. The German
government expects the population to fall from 82m to 65m by 2060, with a
gentle slide accelerating downwards at the end of this decade.

Germany’s buoyant market at this juncture is a mixed blessing for the rest of
the eurozone. It has prompted concerns at the Bundesbank of mini-bubbles in
some German cities. This constrains the European Central Bank from easing
monetary policy for the rest of the currency bloc.

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